[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 25, 2004
__________
Serial No. 108-20
__________
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house04.html
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut, JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
GIL GUTKNECHT, Minnesota Ranking Minority Member
MAC THORNBERRY, Texas JAMES P. MORAN, Virginia
JIM RYUN, Kansas DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington DENNIS MOORE, Kansas
ROB PORTMAN, Ohio JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida CHET EDWARDS, Texas
ADAM PUTNAM, Florida ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado MIKE THOMPSON, California
DAVID VITTER, Louisiana BRIAN BAIRD, Washington
JO BONNER, Alabama JIM COOPER, Tennessee
TRENT FRANKS, Arizona RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, February 25, 2004................ 1
Statement of:
Hon. Alan Greenspan, Chairman, Board of Governors of the
Federal Reserve System..................................... 5
Prepared statement:
Mr. Greenspan................................................ 8
ECONOMIC OUTLOOK AND CURRENT FISCAL ISSUES
----------
WEDNESDAY, FEBRUARY 25, 2004
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:05 a.m., in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Shays, Gutknecht,
Toomey, Hastings, Portman, Brown, Crenshaw, Putnam, Tancredo,
Franks, Garrett, Hensarling, Brown-Waite, Spratt, Moran, Moore,
Neal, Edwards, Scott, Ford, Capps, Thompson, Baird, Cooper,
Emanuel, Davis, Majette, and Kind.
Chairman Nussle. Good morning and welcome to this hearing
of the House Budget Committee. Today, we have with us the very
distinguished Chairman of the Federal Reserve, Alan Greenspan,
to discuss with our committee the economic outlook and the
Federal budget.
Chairman Greenspan, welcome again to the Budget Committee.
We appreciate the time that you are always willing to spend
with this committee, discussing the economy and discussing the
budget over the years. We appreciate the opportunity for that
discourse and discussion again today.
It has been about a year since you last testified before
the committee--actually, almost a year and a half now--and at
that time, our Nation was really still in the early stages of
recovering from the terrorist attack of September 11, 2001, and
its aftermath. We were facing uncertainties at that time about
the war in Iraq, and we still had an economy that at least
appeared to me and to many of my constituents in Iowa was
having a difficult time getting back on track. I think it is
true for many within the country.
No one should underestimate that the challenges that we
have had to overcome these last 3 years have been difficult,
and in fact, we have been, I think, as successful as we have is
really something that we need to discuss today with you: Why is
it that we have seen some of the successes that we are on the
threshold of being able to really take advantage of at this
point in time?
Today, we are really in a much different position--and
certainly a much better--position than last time you came
before the committee. I have got a couple of charts just to
illustrate this point, the economy, in showing robust growth;
and strong growth is expected really to continue. In the third
quarter of 2003, we saw an amazing GDP growth of 8.2 percent,
the highest surge in 20 years. And that was the followed by a
strong growth rate of 4 percent in the fourth quarter--still
strong, certainly, by historic standards.
Housing--starts in chart 2--were running at their highest
level in 20 years, as you can see there.
In chart 3, mortgage interest rates continue to run at
their lowest levels in three decades, and the bank prime rate
is at its lowest level in 45 years. Certainly you have quite a
bit to do with that, Mr. Chairman. We appreciate that.
Inflation, in chart 4, has been running at its lowest rate
in four decades, and I know this is a chart that you are
intimately familiar with. This is probably one of the first
charts, as I understand it, that you pay attention to, as
inflation is one of your concerns.
The U.S. real exports of goods and services rose in the
fourth quarter at a rate of 19 percent, which was the fastest
pace in 7 years, which is a good indicator, particularly for
those of us who have States where we are concerned about
exports, where we are so export dependent.
We have seen a significant increase in the stock market,
and the Dow Jones industrial average up 40 percent since March
of last year.
Chart 5, in addition--and the most important, I think,
which is labor--the markets, the labor markets appear to be
improving. For the past 20-straight weeks, unemployment
insurance claims have remained low and below the benchmark
regarded by economists as a sign of an improving labor market.
In chart 6, we have got an unemployment rate down to 5.6
percent from the 6.3 percent last June. I am not sure anyone
predicted that we would be that low, particularly this early in
2004.
And the last chart, chart 7, really at this point in time,
as you can see, the payroll--employment is growing again. We
need an economy that steadily expands job opportunities for our
citizens, so that everyone who wants to work can work and so
that every working person knows that they can actually get
ahead and balance their own family budget, which really is the
most important budget that I think we should be concerning
ourselves with here, because if their budget is not working,
really none of the budgets of our country are working.
We have asked Chairman Greenspan here today not only to
review the current and clearly improved economic picture, but
also how we got to this point, and what he believes is the best
course of keeping the momentum going. Certainly a large part of
that discussion will focus on the impact of tax relief packages
passed in 2001, 2002, and 2003. I am eager to hear the
chairman's thoughts on what roles those policies continue to
play and how we must now build a foundation of sustained
economic growth.
As I know you have said before, Chairman Greenspan, and I
have certainly said time and time again, in addition to getting
and keeping our economy going, we have got to get our hands
around the other piece of the puzzle, that is controlling
Federal spending. It really does matter. It matters to this
committee, maybe more so than it matters to any other
committee.
We are going to continue to believe in this committee that
the deficits do matter. They are not the be-all and end-all,
certainly, but they are indicative of some of the challenges
that we have to deal with.
All spending must be paid for, either through taxes,
borrowing, or growth in the economy, and those are burdens--
certainly, taxes and borrowing are burdens on the economy. And
for that simple reason alone, controlling spending itself is a
policy, I believe, for continuing economic growth.
You have testified before, and you strongly urged this
committee and the Congress to renew expiring discretionary
caps, PAYGO spending controls; and as you know, those laws have
been allowed to lapse. I strongly support reviving those
statutory controls. I would like to discuss that with you today
and would be interested in your thoughts on that.
I am sure that it wouldn't hurt at all if you would
encourage us in your way to continue to fight for budget
enforcement tools. It is one thing to have a budget plan; it is
yet another to enforce it and give predictability not only to
the Federal Government, but also to the markets, that we are
going to plan our work, own our plan and stick to it and
enforce it over time. I think that gives predictability that is
important stability for the economic markets.
So we welcome you back.
Chairman Greenspan will be with us for 2 hours today, until
noon. He has agreed to testify until that point. So what we
would like to do today is, as much as possible, ask questions.
If you have a speech you would like to put into the record, we
would ask unanimous consent that it be allowed to put in at the
opening, at this point in time. And with that, I would turn to
Mr. Spratt for any comments he would like to make.
Mr. Spratt. Mr. Chairman, welcome back. We appreciate your
coming here to testify. We know that you are called upon many
times to do it, and we appreciate the fact that you would come
and appear before our committee.
Mr. Chairman, you may recall it, but 4 or 5 years ago as we
were basking in the glory of budget surpluses, you were good
enough to come over to the Library of Congress, to the Member's
Room, and meet with the Democratic members of this committee
and talk about the budget and the economy and the best thing
that we could do with the impending surpluses, which were
substantial.
At that time there was a proposal developing that instead
of borrowing and spending Social Security surplus, as we had
for years in the past, we would instead take the surplus
building and accumulating in the Social Security trust fund and
use it to buy back or buy up outstanding Treasury bonds,
thereby reducing the debt held by the public and increasing net
national saving.
As I recall, you told us then you approved of the idea, and
you told us this was the probably the single most efficient way
we could restore some of the deficiency, the woeful deficiency
in saving in our domestic economy.
A year or so later, President Bush came to office. I think
it is partly because he was not here during the 15 years we
struggled to subdue and get our hands around the deficit, he
bought into a ``blue sky'' forecast that indicated that we had
surpluses of $5.6 trillion between 2002-11. And in effect he
bet the budget on this forecast, even though we warned at the
time that there were storm clouds gathering over the economy,
and that those numbers weren't so rosy. They might not be
obtained. There ought to be a margin for error and a margin for
unexpected contingencies.
Well, we have had three things happen now, Mr. Chairman.
First of all, the OMB now comes to us and tells us we were
wrong, that surplus was overstated by at least 55 percent. That
is their acknowledgement today. That means there wasn't a $5.6
trillion surplus at all; it was an economist's construct. And
the economists now tell us that they have got to reconstruct
it, and it looks like more in the range of $2.6 trillion.
If that is a correct estimation of the cumulative surplus
between 2002-11, that means all of it comes from Social
Security. And if we therefore have tax cuts, knowing that we
only have a surplus of $2.6 trillion and all of it comes from
Social Security, then our plan for using the Social Security
surplus to buy back debt, increase net national savings, and
drive down the cost of capital is out the window. It is not
doable anymore.
Secondly, we have had contingencies come up, national
defense, terrorism. We are spending, by our calculation, a
trillion dollars in the Bush years under the Bush defense plan,
more than was anticipated to be spent alone in 2001-02.
Then, of course, we have had a recession intervene, and it
required some stimulative steps on the part of the government,
which also have taken a toll on the budget.
But the question we want to put to you today is, where do
we go from here? How do we get back on that track?
I think you would still agree that we have a deficiency of
net national saving in the country, when the government ``dis-
saves''--that is what a deficit is--we are only contributing to
the problem; and we are skating on pretty thin ice, given the
fact that most of our debt issued today is being bought by
foreigners. We are cutting taxes, largely for upper-bracket
taxpayers, then going out into the world capital markets and
borrowing the money to make up for the lost revenues. A lot of
it is coming from China. Certainly debt means dependency, for
governments and for individuals; surely this practice cannot go
on forever.
And secondly, we have got a reconstruction of the deficits,
as we see when we make realistic adjustments to the spending
line and to the revenue line when we factor in, for example,
the expiring tax cuts and when we consider what the likely cost
of our deployment in Iraq and Afghanistan are going to be; and
instead of taking the middle course between those two lines, it
takes the lower course. And 10 years from now we are about
where we are now. We tread water. There is a little bump for a
good economy right now.
We want to ask you when you testify, do you think this is a
course that is sustainable? Do you think these numbers are
consequential? If so, what are the consequences for our Nation
and for our economy?
Thank you for coming. We look forward to your testimony
today.
Chairman Nussle. Mr. Chairman, your entire statement will
be made part of the record, and you may proceed as you wish.
Again, welcome to the Budget Committee.
STATEMENT OF ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Greenspan. Thank you very much. Mr. Chairman and
members of the committee, as always, I am pleased to be here
today and to offer my views on the outlook for the economy and
current fiscal issues. I want to emphasize that I speak for
myself and not necessarily for the Federal Reserve.
As you know, the U.S. economy appears to have made the
transition from a period of subpar growth to one of more
vigorous expansion, and prospects for sustaining the expansion
in the period ahead are good. This favorable short-term outlook
of the U.S. economy, however, is playing out against a backdrop
of growing concern about the prospects for the Federal budget.
As you are well aware, after having run surpluses for a
brief period around the turn of the decade, the Federal budget
has reverted to deficit. The unified deficits welled to $375
billion in fiscal year 2003, and appears to be continuing to
widen in the current fiscal year. According to the latest
projections from the administration and the Congressional
Budget Office, if current policies remain in place, the budget
will stay in deficit for some time.
For a time, the fiscal stimulus associated with the larger
deficits was helpful in shoring up a weak economy. During the
next few years, these deficits will tend to narrow somewhat as
the economic expansion proceeds and rising incomes generate
increases in revenues.
Moreover, the current ramp-up in defense spending will not
continue indefinitely. Merely maintaining a given military
commitment, rather than adding to it, will remove an important
factor driving the deficit higher. But the ratio of Federal
debt held by the public to GDP has already stopped falling and
has even edged up in the past couple of years, implying a
worsening of the starting point from which policymakers will
have to address the adverse budgetary implications of an aging
population and rising health care costs.
For about a decade, the rules laid out in the Budget
Enforcement Act of 1990 and the later modifications and
extensions of the act provided a procedural framework that
helped the Congress make the difficult decisions that were
required to forge a better fiscal balance. However, the brief
emergence of surpluses eroded the will to adhere to those
rules, and many of the provisions that helped to restrain the
budgetary decisionmaking in the 1990s, in particular the limits
on discretionary spending and the PAYGO requirements, were
violated more and more frequently and, eventually, allowed to
expire.
In recent years, budget debates have turned to choices
offered by those advocating tax cuts and those advocating
increased spending. To date, actions that would lower
forthcoming deficits have received only narrow support, and
many analysts are becoming increasingly concerned that without
a restoration of the budget enforcement mechanisms and the
fundamental political will that they signal, the in-built
political bias in favor of red ink will once again become
entrenched.
In 2008, just 4 years from now, the first cohort of the
baby boom generation will reach 62, the earliest age at which
Social Security retirement benefits may be claimed, and the age
at which about half of prospective beneficiaries choose to
retire.
In 2011, these individuals will reach 65 and will, thus, be
eligible for Medicare. At that time, under the intermediate
assumptions of the OASDI trustees, there will still be more
than three covered workers for each OASDI beneficiary. By 2025,
this ratio is projected to be down to two and a quarter. This
dramatic demographic change is certain to place enormous
demands on our Nation's resources, demands we almost surely
will be unable to meet unless action is taken. For a variety of
reasons, that action is better taken as soon as possible.
The budget scenarios considered by the CBO in its December
assessment of the long-term budget outlook offer a vivid and
sobering illustration of the challenges we face as we prepare
for the retirement of the baby boom generation. These scenarios
suggest that under a range of reasonably plausible assumptions
about spending and taxes, we could be in a situation in the
decades ahead in which rapid increases in the unified budget
deficit set in motion a dynamic in which large deficits result
in ever-growing interest payments that augment deficits in
future years. The resulting rise in the Federal debt could
drain funds away from private capital formation and, thus, over
time, slow the growth of living standards.
Favorable productivity developments, of course, can help to
alleviate the impending budgetary strains, but no one should
expect productivity growth to be sufficient to bail us out.
Indeed, productivity would have to grow at a rate far above its
historical average to fully resolve the long-term financing
problems of Social Security and Medicare. Higher productivity,
of course, buoys expected revenues to the system, but it also
raises Social Security obligations.
Moreover, although productivity has no direct link to
Medicare spending, historical experience suggests that the
demand for medical services increases with real income which,
over time, rises in line with productivity.
Today, Federal outlays under Social Security and Medicare
amount to less than 7 percent of the GDP. In December, CBO
projected that these outlays would increase to 12 percent of
GDP by 2030 under current law, using assumptions about the
growth of health care costs similar to the intermediate
assumptions of the Medicare trustees.
When spending on Medicaid is added in, the rise in the
ratio is even steeper. To be sure, the rise in these outlays
relative to GDP could be financed by tax increases, but the CBO
results suggest that even if other noninterest spending is
constrained fairly tightly, ensuring fiscal stability would
require an overall Federal tax burden well above its long-term
average.
Most experts believe that the best baseline for planning
purposes is to assume that the demographic shift associated
with retirement of the baby boom generation will be permanent;
that is, it will not reverse when that cohort passes away.
Indeed, so long as longevity continues to increase and assuming
no significant changes in immigration or fertility rates, the
proportion of elderly in the population will only rise. If this
fundamental change in age distribution materializes, we will
eventually have no choice but to make significant structural
adjustments in the major retirement programs.
One change that the Congress can consider, as it moves
forward on this critical issue, is to replace the current
measure of the cost of living that is used for many purposes
with respect to both revenues and outlays with a more
appropriate price index. As you may be aware, in 2002, the
Bureau of Labor Statistics introduced a new price index that
chained the Consumer Price Index. The new index is based on the
same underlying individual prices as in the official CPI, but
it combines those prices so as to remove some of the
inadvertent bias in the official price index, and thus, it
better measures changes in the cost of living, the statutory
intent of the indexing.
Shifting to the chain-weighted measure would not address,
perhaps, more fundamental shortcomings in the CPI, most notably
the question of whether quality improvement is adequately
captured, but it would be an important step toward better
implementation of the intention of the Congress.
Another possible adjustment relates to the age at which
Social Security and Medicare benefits will be provided. Under
current law and even with the so-called ``normal retirement
age'' for Social Security slated to move up to 67 over the next
two decades, the ratio of the number of years that a typical
worker will spend in retirement to the number of years he or
she works will rise in the long term. A critical step forward
would be to adjust the system so that this ratio stabilizes.
A number of specific approaches have been proposed for
implementing this indexation, but the principle behind all of
them is to insulate the finances of the system, at least to a
degree, from further changes in life expectancy. Sound private
and public decisionmaking will be aided by determining ahead of
the fact how one source of risk, namely demographic
developments, will be dealt with.
The degree of uncertainty about whether future resources
will be adequate to meet our current statutory obligations to
the coming generations of retirees is truly daunting. The
uncertainty is especially great for Medicare, because we know
very little about how rapidly medical technology will continue
to advance and how those innovations will translate into future
spending. As a result, the range of possible outlays per
recipient is extremely wide.
This uncertainty is an important reason to be cautious,
especially given that government programs, whether for spending
or for tax preferences, are easy to initiate, but can be
extraordinarily difficult to shut down once constituencies for
them develop.
In view of these considerations, I believe that a thorough
review of our spending commitments and at least some
adjustments in those commitments is necessary for prudent
policy.
I also believe that we have an obligation to those in or
near retirement to honor what has been promised to them. If
changes need to be made, they should be made soon enough so
that future retirees have time to adjust their plans for
retirement spending, and to make sure that their personal
resources, along with what they expect to receive from the
government will be sufficient to meet their retirement needs.
I certainly agree that the same scrutiny needs to be
applied to taxes. However, tax rate increases of sufficient
dimension to deal with our looming fiscal problems arguably
pose significant risks to economic growth and the revenue base.
The exact magnitude of such risks is very difficult to
estimate, but they are of enough concern, in my judgment, to
warrant aiming to close the fiscal gap primarily, if not
wholly, from the outlay side.
The dimension of the challenge is enormous, but history has
shown that when faced with major challenges, elected officials
have risen to the occasion. In particular, over the past 20
years or so, the prospect of large deficits has generally led
to actions to narrow them. I trust that the recent
deterioration in the budget outlook and the fast-approaching
retirement of the baby boom generation will be met with similar
determination and effectiveness.
Thank you very much, Mr. Chairman. I look forward to your
questions.
[The prepared statement of Mr. Greenspan follows:]
Prepared Statement of Hon. Alan Greenspan, Chairman, Board of Governors
of the Federal Reserve System
Mr. Chairman and members of the committee, I am pleased to be here
today and to offer my views on the outlook for the economy and current
fiscal issues. I want to emphasize that I speak for myself and not
necessarily for the Federal Reserve.
As you know, the U.S. economy appears to have made the transition
from a period of subpar growth to one of more vigorous expansion. Real
gross domestic product (GDP) rose briskly in the second half of last
year, fueled by a sizable increase in household spending, a notable
strengthening in business investment, and a sharp rebound in exports.
Moreover, productivity surged, prices remained stable, and financial
conditions improved further. Overall, the economy has lately made
impressive gains in output and real incomes, although progress in
creating jobs has been limited.
The most recent indicators suggest that the economy is off to a
strong start in 2004, and prospects for sustaining the expansion in the
period ahead are good. The marked improvement in the financial
situations of many households and businesses in recent years should
bolster aggregate demand. And with short-term real interest rates close
to zero, monetary policy remains highly accommodative. Also, the
impetus from fiscal policy appears likely to stay expansionary through
this year. At the same time, increases in efficiency and a significant
level of underutilized resources should help keep a lid on inflation.
This favorable short-term outlook for the U.S. economy, however, is
playing out against a backdrop of growing concern about the prospects
for the Federal budget. As you are well aware, after having run
surpluses for a brief period around the turn of the decade, the Federal
budget has reverted to deficit. The unified deficit swelled to $375
billion in fiscal year 2003 and appears to be continuing to widen in
the current fiscal year. According to the latest projections from the
administration and the Congressional Budget Office (CBO), if current
policies remain in place, the budget will stay in deficit for some
time.
In part, the recent deficits have resulted from the economic
downturn in 2001 and the period of slow growth that followed, as well
as the sharp declines in equity prices. The deficits also reflect a
significant step-up in spending on defense and higher outlays for
homeland security and many other nondefense discretionary programs. Tax
reductions--some of which were intended specifically to provide
stimulus to the economy--also contributed to the deterioration of the
fiscal balance.
For a time, the fiscal stimulus associated with the larger deficits
was helpful in shoring up a weak economy. During the next few years,
these deficits will tend to narrow somewhat as the economic expansion
proceeds and rising incomes generate increases in revenues. Moreover,
the current ramp-up in defense spending will not continue indefinitely.
Merely maintaining a given military commitment, rather than adding to
it, will remove an important factor driving the deficit higher. But the
ratio of Federal debt held by the public to GDP has already stopped
falling and has even edged up in the past couple of years--implying a
worsening of the starting point from which policymakers will have to
address the adverse budgetary implications of an aging population and
rising health care costs.
For about a decade, the rules laid out in the Budget Enforcement
Act of 1990, and the later modifications and extensions of the act,
provided a procedural framework that helped the Congress make the
difficult decisions that were required to forge a better fiscal
balance. However, the brief emergence of surpluses eroded the will to
adhere to those rules, and many of the provisions that helped to
restrain budgetary decisionmaking in the 1990s--in particular, the
limits on discretionary spending and the PAYGO requirements--were
violated more and more frequently and eventually allowed to expire. In
recent years, budget debates have turned to choices offered by those
advocating tax cuts and those advocating increased spending. To date,
actions that would lower forthcoming deficits have received only narrow
support, and many analysts are becoming increasingly concerned that,
without a restoration of the budget enforcement mechanisms and the
fundamental political will they signal, the inbuilt political bias in
favor of red ink will once again become entrenched.
In 2008--just 4 years from now--the first cohort of the baby boom
generation will reach 62, the earliest age at which Social Security
retirement benefits may be claimed and the age at which about half of
prospective beneficiaries choose to retire; in 2011, these individuals
will reach 65 and will thus be eligible for Medicare. At that time,
under the intermediate assumptions of the OASDI trustees, there will
still be more than three covered workers for each OASDI beneficiary; by
2025, this ratio is projected to be down to 2\1/4\. This dramatic
demographic change is certain to place enormous demands on our nation's
resources--demands we almost surely will be unable to meet unless
action is taken. For a variety of reasons, that action is better taken
as soon as possible.
The budget scenarios considered by the CBO in its December
assessment of the long-term budget outlook offer a vivid--and
sobering--illustration of the challenges we face as we prepare for the
retirement of the baby boom generation. These scenarios suggest that,
under a range of reasonably plausible assumptions about spending and
taxes, we could be in a situation in the decades ahead in which rapid
increases in the unified budget deficit set in motion a dynamic in
which large deficits result in ever-growing interest payments that
augment deficits in future years. The resulting rise in the Federal
debt could drain funds away from private capital formation and thus
over time slow the growth of living standards.
Favorable productivity developments, of course, can help to
alleviate the impending budgetary strains, but no one should expect
productivity growth to be sufficient to bail us out. Indeed,
productivity would have to grow at a rate far above its historical
average to fully resolve the long-term financing problems of Social
Security and Medicare. Higher productivity, of course, buoys expected
revenues to the system, but it also raises Social Security obligations.
Moreover, although productivity has no direct link to Medicare
spending, historical experience suggests that the demand for medical
services increases with real income, which over time rises in line with
productivity.
Today, Federal outlays under Social Security and Medicare amount to
less than 7 percent of GDP. In December, the CBO projected that these
outlays would increase to 12 percent of GDP by 2030 under current law,
using assumptions about the growth of healthcare costs similar to the
intermediate assumptions of the Medicare trustees; when spending on
Medicaid is added in, the rise in the ratio is even steeper. To be
sure, the rise in these outlays relative to GDP could be financed by
tax increases, but the CBO results suggest that, even if other
noninterest spending is constrained fairly tightly, ensuring fiscal
stability would require an overall Federal tax burden well above its
long-term average.
Most experts believe that the best baseline for planning purposes
is to assume that the demographic shift associated with the retirement
of the baby boom generation will be permanent--that is, it will not
reverse when that cohort passes away. Indeed, so long as longevity
continues to increase--and assuming no significant changes in
immigration or fertility rates--the proportion of elderly in the
population will only rise. If this fundamental change in the age
distribution materializes, we will eventually have no choice but to
make significant structural adjustments in the major retirement
programs.
One change the Congress could consider as it moves forward on this
critical issue is to replace the current measure of the ``cost of
living'' that is used for many purposes with respect to both revenues
and outlays with a more appropriate price index. As you may be aware,
in 2002, the Bureau of Labor Statistics introduced a new price index--
the chained consumer price index (CPI). The new index is based on the
same underlying individual prices as is the official CPI. But it
combines those prices so as to remove some of the inadvertent bias in
the official price index, and thus it better measures changes in the
cost of living, the statutory intent of the indexing. All else being
equal, had a chained CPI been used for indexing over the past decade,
the cumulative unified budget deficit and thus the level of the Federal
debt would have been reduced about $200 billion; higher receipts and
the reduction in debt service associated with those higher receipts
account for roughly 60 percent of the saving, with the remainder
attributable to lower outlays. Shifting to the chain-weighted measure
would not address perhaps more fundamental shortcomings in the CPI--
most notably the question of whether quality improvement is adequately
captured--but it would be an important step toward better
implementation of the intention of the Congress.
Another possible adjustment relates to the age at which Social
Security and Medicare benefits will be provided. Under current law, and
even with the so-called normal retirement age for Social Security
slated to move up to 67 over the next two decades, the ratio of the
number of years that the typical worker will spend in retirement to the
number of years he or she works will rise in the long term. A critical
step forward would be to adjust the system so that this ratio
stabilizes. A number of specific approaches have been proposed for
implementing this indexation, but the principle behind all of them is
to insulate the finances of the system, at least to a degree, from
further changes in life expectancy. Sound private and public
decisionmaking will be aided by determining ahead of the fact how one
source of risk, namely demographic developments, will be dealt with.
The degree of uncertainty about whether future resources will be
adequate to meet our current statutory obligations to the coming
generations of retirees is daunting. The concern is not so much about
Social Security, where benefits are tied in a mechanical fashion to
retirees' wage histories and we have some useful tools for forecasting
future outlays. The outlook for Medicare, however, is much more
difficult to assess. Although forecasting the number of program
beneficiaries is reasonably straightforward, we know very little about
how rapidly medical technology will continue to advance and how those
innovations will translate into future spending. To be sure,
technological innovations can greatly improve the quality of medical
care and can, in theory, reduce the costs of existing treatments. But
because medical technology expands the range of treatment options, it
also has the potential of adding to overall spending--in some cases,
significantly. As a result, the range of possible outlays per recipient
is extremely wide. This uncertainty is an important reason to be
cautious--especially given that government programs, whether for
spending or for tax preferences, are easy to initiate but can be
extraordinarily difficult to shut down once constituencies for them
develop.
In view of this upward ratchet in government programs and the
enormous uncertainty about the upper bounds of future demands for
medical care, I believe that a thorough review of our spending
commitments--and at least some adjustment in those commitments--is
necessary for prudent policy. I also believe that we have an obligation
to those in and near retirement to honor what has been promised to
them. If changes need to be made, they should be made soon enough so
that future retirees have time to adjust their plans for retirement
spending and to make sure that their personal resources, along with
what they expect to receive from the government, will be sufficient to
meet their retirement needs.
I certainly agree that the same scrutiny needs to be applied to
taxes. However, tax rate increases of sufficient dimension to deal with
our looming fiscal problems arguably pose significant risks to economic
growth and the revenue base. The exact magnitude of such risks is very
difficult to estimate, but they are of enough concern, in my judgment,
to warrant aiming to close the fiscal gap primarily, if not wholly,
from the outlay side.
The dimension of the challenge is enormous. The one certainty is
that the resolution of this situation will require difficult choices
and that the future performance of the economy will depend on those
choices. No changes will be easy, as they all will involve lowering
claims on resources or raising financial obligations. It falls on the
Congress to determine how best to address the competing claims. In
doing so, you will need to consider not only the distributional effects
of policy change but also the broader economic effects on labor supply,
retirement behavior, and private saving.
History has shown that, when faced with major challenges, elected
officials have risen to the occasion. In particular, over the past
twenty years or so, the prospect of large deficits has generally led to
actions to narrow them. I trust that the recent deterioration in the
budget outlook and the fast-approaching retirement of the baby boom
generation will be met with similar determination and effectiveness.
Chairman Nussle. Thank you, Mr. Chairman. And again, for
Member's purposes, Chairman Greenspan has to leave at noon. So
I would ask Members not only to stay within their 5 minutes,
but to use that time as efficiently as possible.
Please turn on the clock for me, too.
Mr. Chairman, as you say in your statement, during the next
few years, these deficits will tend to narrow somewhat as the
economic expansion proceeds and rise in income generates
increases in revenue. Moreover, the current ramp-up in defense
spending will not continue indefinitely, and that obviously
will remove, as you say, an important factor for driving
deficits higher.
I want to make sure, in saying that, are you suggesting
that we have time to begin the process to control spending and
to get the deficits under control? Or are you suggesting that
we should take the time now, combined with what you say,
naturally, will be occurring in the economy and with personal
incomes and with some of the needs for that spending to be
naturally decreased, that we should take that time now?
So how much time, in your judgment, do we have to
demonstrate not only to you, but also to the American people
and the marketplace that we are serious about controlling the
deficits and the budget?
Mr. Greenspan. Mr. Chairman, I think the time is reasonably
short largely because it is going to take a long time in and of
itself to institute and create a different line of projection
and trajectory for both revenues and spending to work their way
into the process. The particular point where I think we have to
be very careful is that point at which the expectation of
looming deficits in the next decade begins to impact on long-
term interest rates.
Currently, I don't know where that is. I don't believe it
is in the immediate future. It is out there somewhere. It is
out there in this decade by all of the analysis that we can
make. And I would suggest that it is essential, if our purpose
is to find a way of gliding into what is probably one of the
most difficult fiscal situations we have ever faced, because of
the sharp rise in the baby boom generation retirement coupled
with fairly extensive entitlement programs for all of those
people as they move from working, productive people into a
long-sought retirement.
My judgment is that it is going to take several years at a
minimum to construct programs which are credible to the
markets. And I think it is very important that what we do, as
far as fiscal policy is concerned, is to fend off what will
invariably be the case if no action is taken at all.
In other words, if we are looking strictly at a current
services budget, we are going to be confronted within a few
years with a marked upward ratcheting of long-term interest
rates, which is very debilitating to long-term economic growth.
Chairman Nussle. Well, then let's take the short term for a
moment.
Is a tax increase at this moment in time for our economy
the right recipe if, in fact, we can begin to demonstrate
within a fiscal blueprint the ability to control spending, both
on the discretionary and at least begin to control spending on
the mandatory side of the ledger?
Mr. Greenspan. Mr. Chairman, I think that the outlook on
the whole fiscal issue is so daunting that it is important that
we maintain the revenue base, meaning that we maintain economic
growth, such that we are able to get the types of revenues that
we need and will need in the future to meet our obligations.
The crucial issue out here is the rate of growth of
productivity and the rate of growth of the economy. What
history does tell us is that keeping tax rates down will tend
to maximize that. And while I fully recognize that it is an
easy solution to a problem, when you have a deficit, to
increase taxes, it is not evident to me that over the long run
that actually works.
So it is crucially important as step No. 1 to make sure
that we have the same sort of viable, expanding economy which
we have been observing for a number of years; and that
requires, in my judgment, significant restrain the tax side.
As I say in my prepared remarks, I am fully aware of the
fact that it may not be possible to keep the tax rate down and
still maintain some semblance of deficit control. Because of
this concern that I would have, I would strongly recommend that
the priority of evaluation start with the expenditure side--
focussing on what can be constrained, what can be reduced--and
only after you have run out of all of those options, would I
advert to the revenue side, recognizing that you have long-term
potential stability if the adjustments are made primarily on
spending, and if there are significant increases in taxation,
risks are there to the long-term economic outlook and,
therefore, the revenue base itself.
Chairman Nussle. Let me suggest to you in my final--and I
apologize for going over. Let me just suggest to you, as a
final question, a scenario and ask for your comment on whether
or not you believe this would be at least a serious, short-term
beginning toward solving this problem:
No. 1, we have a transportation bill that fits within the
tax revenue base that has been segregated for its use, the Road
Use Trust Fund. The President has suggested a 21-percent
increase in transportation spending remaining within the trust
fund balances. Congress passing the bill that actually
accomplishes that, and not deficit spending for transportation,
but allowing that 21-percent increase for job creation, that is
No. 1.
No. 2, a budget plan that does limit spending growth below
what the President has suggested, bringing the deficit down
below $500 billion for this first year, as an example, as
opposed to the $521 billion deficit that the President
proposed, and that we at least begin the process of looking at
some of the mandatory side. Certainly all of it would be
difficult, as you suggested, but beginning that look.
No. 3, that we do pass a cap extension and a PAYGO
extension. If you saw those three items work their way through
this committee and through the Congress, would that give you a
positive reflection on what we are doing and a serious
attention toward deficit reduction, or are there other steps
that you would suggest in order to demonstrate seriousness?
Mr. Greenspan. I would first, Mr. Chairman, restore PAYGO
and discretionary caps. Without a process for evaluating
various tradeoffs, I see no way that any group such as a
Congress can come to a set of priorities which will effectively
reflect the will of the American people.
So doing things without the PAYGO and discretionary caps is
a good start, but urge you to make certain that you are getting
the process in place, because a lot of very seriously difficult
decisions are going to have to be made by this committee and
your counterparts in the Senate; and unless you have a
mechanism for arraying priorities, I think it is going to be an
almost impossible job. And I would say, the first priority is
process, and then anything you can do subsequent to that I
think is very helpful.
Chairman Nussle. Thank you.
Mr. Spratt.
Mr. Spratt. Mr. Chairman, to follow up on your last
comment, in saying that you would favor an extension of the
PAYGO rule, do you mean the PAYGO rule in its original form
that would apply both to entitlement increases and to tax cuts
so that both would have to be offset and be deficit neutral?
Mr. Greenspan. Yes. I am talking about the particular rule
that was in place before its expiration on the September 30,
2002.
Mr. Spratt. Let me show you again the chart that I had in
my opening statement, because what we have tried to do in this
particular chart is assume realistically what happens if all of
the tax cuts that are slated to expire are, in fact, renewed.
Across the bottom line there, we have tried to make what we
regard as politically realistic corrections, including the
major assumption that all of the expiring tax cuts will be
renewed. As a consequence, there is a bit of an uptick in the
bottom line of the budget, and then for the next 10 years, it
ranges from nearly $400 billion to $500 billion.
No. 1, do you think this is a sustainable course, and if
not, what are the consequences likely to be if we take this
course? No. 2, will it affect long-term interest rates, as you
warned?
Mr. Greenspan. Well, actually that particular pattern
probably is already embodied in the marketplace.
Mr. Spratt. You think the markets are assuming that we will
be $500 billion in deficit still 10 years from now?
Mr. Greenspan. But remember, $500 billion in 2014 as a
percent of a GDP will be significantly less than today. It is
still a problem.
I am worried about larger budget deficits than that.
Mr. Spratt. As a result of Social Security and Medicare?
Mr. Greenspan. I think, Congressman, that there is a wide
range of error. Not on Social Security--Social Security we know
within certain limits what can happen; it is a defined benefit
program.
We really do not have a clue about the outlook for Medicare
and never have. It has been a remarkably difficult forecasting
process, largely because the technology has been awesome and
unforecastable, as indeed all innovation is. And with the
advances currently in place and the type of things that are
developing, I am not saying the most probable outcome is
something significantly different from the intermediate report
of the Medicare trustees, but the range for error is quite
large. I think this committee has to take into consideration
the possibility that there may be a problem there. And if there
is, then we have a more unstable set of numbers than that.
That looks like a very smooth curve to me. And the one
thing we know about the real world is it never looks like the
smooth projections we put down on paper.
Mr. Spratt. Let me ask you this. You said that you were for
an extension of the original PAYGO rule, which would apply to
tax cuts as well as to entitlement increases.
Does that mean you would advise us that as we approach
these sunsets and expirations and existing tax cuts, that they
be offset before the renewal be passed?
Mr. Greenspan. Yes, sir.
Mr. Spratt. Thank you very much, sir.
Let me ask you also about the jobless recovery we find
ourselves in. It is unlike most of the 10 recessions that we
have experienced since the end of the Second World War. Here we
are years after the official recovery and we still have a loss
of 2.2 million jobs in the private sector--2.9 million in the
private sector, 2.2 million overall.
There is some controversy about which is the best source
for estimating the job losses in the economy. The so-called
Business Establishment Survey, which goes to business
establishments and looks at their payrolls, a large sample of,
I think, 400,000 firms; or the Household Survey, which has a
large sample, but still a much smaller sample and interviews
and extrapolates from individual households.
Has the Fed done work in this area to see which is a better
index indicator of unemployment?
Mr. Greenspan. Not of unemployment, but of job growth, yes,
Congressman. It turns out that, as best we can judge without
getting into the details, the Household Survey, which is
constructed by getting the average relationship in a 60,000
sample between the proportion of people working and the
proportion of people in those households and then applying that
ratio to an estimate of population is less reliable. As best we
can judge, looking at it from a variety of different sources,
the immigration numbers that are implicit in the population
projections extended from the year 2000 when the Census was
taken, are much too high, and indeed, they seem to have
flattened out significantly from September 2001, thereafter.
I say this, as what would be implied in population numbers
if we took not the 400,000 sample that you referred to in the
so-called ``payroll sample,'' but the full, insured
unemployment count, so it is almost a Census count, and convert
that into the implied level of population. What we find is, the
Census Bureau's projection of the population just goes straight
up, and this revised, synthetic population goes up through
September 2001, then flattens out quite significantly.
The implication here is that immigration is probably
grossly overestimated, and if that is the case and the
population is actually going on a slower path than the official
data, if you take the household ratios--that is, of employment
to population ratios--and multiply them by the lower population
trajectory, you will get a lower growth rate in household
employment.
So we have concluded that the data on the so-called
``payroll survey'' is assuredly the more accurate of the two
and that our suspicion is that at the end of the day there will
be revisions in the household data.
Now, with one caveat, let me just make a point here which
is that it is true that self-employed people are not in the
payroll series. And those numbers have behaved far more
strongly than the underlying payroll data, so if you add both
of them together, you probably have got the best estimate of
what true employment is. That shows less of a decline than you
were quoting, Congressman, but still shows something far more
closely related to the payroll, rather than the household
series.
Mr. Spratt. Well, one final question. You lean strongly in
favor of spending cuts as opposed to tax increases in order to
resolve this problem. But, let me read you what a fine young
economist named Peter Orzag has developed as to what we would
have to do on the spending side to erase this deficit.
It would take a 48-percent cut in Social Security benefits,
a 57-percent cut in Medicare, elimination of the Federal
contribution to Medicaid, or a 53-percent cut in all spending
other than defense, homeland security, Social Security,
Medicaid and Medicare, or an 80-percent cut in all domestic
discretionary spending.
Don't those indicate to you that--that slight suggestion in
your testimony today, that tax increases might have to be part
of the solution?
Mr. Greenspan. You are merely describing the size of the
problem that you are confronted with.
Mr. Spratt. I am, indeed. But you have been around the town
much longer than most of the people in this room. Do you think
that cuts of that magnitude are politically realistic?
Mr. Greenspan. I don't think that they are. But I still
think you have to start with the presumption that you are going
to get as much as you can on that side, because what I think
has happened in this country is, we have constructed by statute
a series of entitlements which, when multiplied per capita, per
person, per retiree, by the number of retirees, that we know
with an almost marginal error, we have a level of commitment of
real resources to fund those requirements which is very large
relative to the potential GDP.
We are dealing with real resources. Finance is merely an
intermediate way of trying to measure what we are doing. And I
am basically saying that we are overcommitted at this stage.
To the extent that we try to resolve the overcommitment on
the government side by raising taxes, we are risking lowering
the rate of economic growth and the revenue base. And I am
merely suggesting, how I would go about it.
Let me be very specific.
If you are able, which I don't believe you will be, to
resolve this issue wholly on the spending side, that will
create a fiscal trajectory which is sustainable over the longer
term with fairly strong economic growth associated with it.
If you try to do it all on the tax side, my suspicion is
you will find that you don't succeed because the tax base will
begin to erode.
Somewhere in the middle--probably, in my judgment, far
closer to the spending side than the tax side--is the necessary
outcome.
But our problem essentially is, we have been making
commitments without focusing on our capability of meeting them,
and I think it is terribly important to make certain that we
communicate to the people who are about to retire, what it is
that they are going to have to live with. And if we promise
more than we can actually physically deliver, I think it will
be a major blot on our whole fiscal process.
So I am saying that this is a much larger problem than we
can handle, and the only thing that will bail us out, as far as
I can see, is if Medicare for reasons I don't understand, comes
in at the lower end of all of the projections that are
currently being made.
Mr. Spratt. Sounds like divine intervention to me. Thank
you, Mr. Chairman, very much for your testimony.
Chairman Nussle. Mr. Gutknecht.
Mr. Gutknecht. Thank you.
Dr. Greenspan, it is always great to have you up here. Just
for the record, I agree with virtually everything that you have
said. And to put it in short what you said about the retirement
entitlements, we are writing checks that our children may not
be able to cash. Isn't that true?
Mr. Greenspan. Yes, sir.
Mr. Gutknecht. I want to come back to one of the things
that is most disturbing to us here, something that was alluded
to by Mr. Spratt, and that is what OMB told us just 3 years
ago, that we could be looking forward to surpluses of $5.5
trillion. They have now revised that and said at that point in
time they should have only said it was $2.2 trillion.
How do we square those rather enormous differences between
economic projections?
Mr. Greenspan. It is inherent in what we are trying to do.
Remember, we have got two very large numbers. And over these
years, it has been $1 [trillion] to $2 trillion on receipts and
$1 [trillion] to $2 trillion on expenditure. What we are trying
to do is to measure the difference between those two; and very
small differences, even in the current period, create very
large differences. Any small differences in either of the
totals create very large differences in the difference. And
when you start to project that problem out into the future, the
range of error is awesomely large.
In fact, I remember CBO used to have a spread of
probabilities, and it ranged, at first glance, extraordinarily
wide. And it turned out, 2 years later they were outside of
even that huge spread.
The reason I raise this question in my prepared remarks
about the error issue here is that you can't create budget
policy strictly on the basis of trying to focus on a specific
forecast. You have got to take into consideration what will
happen if you are wrong. What are the consequences of being
wrong?
And what I am saying is that the consequences of being
wrong on the tax side, that is, raising too much in tax
revenues for the purpose of solving this particular problem,
create potential downsides which are far greater, in my
judgment, than mistakes on the other side.
Mr. Gutknecht. Can I come back to a question that we have
here--that I have, because I do think the economy is improving,
and I appreciate the fact that you believe the economy is
improving and will continue to improve.
But that leaves us with a question that I can't explain,
that is, if the economy--when we are seeing the kind of growth
that we are seeing is as strong as it is, why do receipts to
the Federal Government continue to lag so badly?
Mr. Greenspan. Well, I think that is an issue which always
confounds OMB and CBO.
It is these so-called ``technical adjustments,'' which they
try to figure out currently, when all they can see are tax
receipts and their estimates of income from the gross domestic
product. Until they get statistics on income a couple of years
later, they really have no way of knowing exactly why these
relationships changed.
I don't know the answer to that. I do know that, of course,
they have been adjusted down. There is a general expectation
that in the short run they will be revised back up.
We had an unexpected dip the last couple of years. Most
budget projectors are presuming that it is going to come back.
I frankly don't have a clue.
Mr. Gutknecht. Well, I appreciate your candor.
One last point: I do hope you will continue to speak out on
the issue of returning to PAYGO and spending caps or some
version thereof, because it is clear if you look at the charts
where this Congress began to lose its way, is when those were
allowed to expire; and I think the time has come for us to have
something with teeth in it relative to the way we budget and
the way we spend the people's money.
Thank you very much.
Mr. Shays [presiding]. I thank the gentleman.
We have on our list Mr. Neal and Mr. Edwards and Ms. Capps
on this side, and Mr. Franks and Mr. Garrett on our side. We
now go first to Mr. Neal.
Mr. Neal. Thank you.
Mr. Chairman, let me raise a question with you about
amnesia. The Republican majority leader here suggested in the
late 1990s--and I say this as one who has been around for this
debate for 16 years----
Mr. Greenspan. I have been engaged with you for 16 years.
Mr. Neal. You have, Mr. Chairman, first on the Banking
Committee, then on the Ways and Means Committee and on the
Budget Committee. We have engaged well.
But I want to ask you a couple of questions here.
The Republican majority leader in the late 1990s said that
those votes that we were to take were taking us down the road
to a depression. And the chairman of this committee at the
time, my friend, Mr. Kasich, and a good guy, he said we were
headed toward fiscal Armageddon with the budget votes that we
took with Bush I and twice with Clinton.
Is it your position that there was a pretty strong economic
performance in the mid-to-late 1990s?
Mr. Greenspan. There was, indeed.
Mr. Neal. Would you suggest that that investment boom, the
maturation of productivity as we witnessed it, now is
continuing?
Mr. Greenspan. The productivity boom is certainly
continuing.
Mr. Neal. The productivity boom. So if the economic
performance, Mr. Chairman, of the 1990s was so outstanding,
what was so bad about the tax system that we had in the mid-to-
late 1990s?
Mr. Greenspan. I never said there was something wrong about
the tax system in the 1990s.
Mr. Neal. We appreciate that. That helps my point.
Mr. Chairman, let me ask you this: My friends on the other
side repeatedly say that we received and achieved a great
victory in the tax cut on capital gains, for example, in 1997.
They claim that this was a very important source of
economic growth. Well, what was so bad about that system in
1997 that we had to change it with these tax cuts that we have
today?
Mr. Greenspan. Well, first of all, remember that the
revenues that were coming in during that period and subsequent
to that period were very heavily influenced by the stock
market, first, in realized capital gains; secondly, in
surprisingly large amount, the taxes on the exercise of stock
options.
That disappeared virtually overnight, as the people in
California have been observing with some chagrin, so that the
illusion of a high revenue input of the system was an illusion
which carried on for quite a period thereafter.
If you are asking my judgment, over the longer run, if you
do not continuously cut tax rates, you will end up with ever
higher taxation, because there is so-called, as you know, drift
in tax brackets, called ``bracket creep.'' So, in my view, we
should be continuously cutting taxes to keep the burden
contained. That is my general position. That has always been my
position.
Mr. Neal. You were party to those conversations,
apparently, with Secretary O'Neill in terms of discussions as
to this PAYGO issue. We have been through this, again over this
decade and a half.
Did you support the O'Neill position in those discussions
with the President as to how we should proceed with tax cuts?
Mr. Greenspan. I was not in the meeting with the President.
Is that what you mean?
Mr. Neal. Well, I think Mr. O'Neill suggests that there
were meetings that took place, I think--I believe he suggested
in the Price of Loyalty, his book, that the tax cuts should be
reduced if the deficits become problematic.
Was that a position that you shared? Did you have any
discussions?
I assume that----
Mr. Greenspan. In fact, I think I may have testified before
this committee on that issue.
Mr. Neal. So you would agree with that position?
Mr. Greenspan. I suggested that triggers ought to be part
of the package.
Mr. Neal. OK.
Mr. Greenspan. That is what we had been discussing. I
presume that is what you are referring to, the O'Neill
situation.
Mr. Neal. Yes, it is.
Mr. Greenspan. I recommended it publicly before this
committee.
Mr. Neal. We appreciate your comments.
I would once again, Mr. Chairman--just as I close, I am
still troubled by the argument that when we all herald the mid-
to-late 1990s in terms of great economic achievement, why we
had to radically alter the tax structure as we proceeded to
this period of time.
Thanks for your testimony.
Mr. Shays. Thank the gentleman.
We are going to go to Mr. Franks, then Mr. Edwards, then to
Mr. Garrett.
Mr. Franks.
Mr. Franks. Thank you, Mr. Chairman.
Mr. Greenspan, we appreciate so much your testimony here
today, your candor and just your erudite understanding of some
of the things that really make it difficult for a lot of us to
clearly grasp. Economics is something that the nomenclature,
the complexity of it is something that I think overcomes most
of the general public, including the one that is talking to
you.
Having said that, you have put forth some general ideas
that I think reflect those of us of a conservative Republican
persuasion very clearly.
Might I ask you a fairly direct question? Do you believe,
as was articulated as far back as in the Kennedy
administration, that carefully crafted tax cuts ultimately
increase the revenue to government?
Mr. Greenspan. I believe that economic growth obviously is
the key to revenue for government, and carefully crafted tax
cuts are one factor involved in encouraging such growth.
Mr. Franks. Well, that essentially brings me to the next
question. In terms of the greatest factors in your mind to
incent productivity and economic growth, what would those
factors be in the public policy area that we can control in
this body?
Mr. Greenspan. It depends on how broad you wish to get.
That part of our economy which has been most important in
expanding economic growth is the ever increasing flexibility
that has occurred in this economy over the last 25 years. I
have discussed this at length in many different venues. The
result is the flexibility is reflected in the fact that we have
indeed come through a period since mid-2000 characterized by a
very sharp decline of the stock market, by a collapse in
investment, by 9/11, by corporate scandals and then of course
the wars in Afghanistan and Iraq, and the economy barely moved.
It absorbed all of these shocks which in my judgment would have
created a severe economic contraction 30 or 40 years earlier.
That is basically coming about because of the flexibility that
is implicit in those events. Our ability to get through those
events is the result of a bipartisan 25-year move toward
deregulation in a lot of different areas, of the remarkable
increase in technological advance which has made the economy
far more efficient and far more capable of responding to
adversity.
Information technology, as we are all aware, has made
everybody capable of making decisions in real time instead of
waiting for your accountant to give you what is happening to
your inventories 3 weeks later when you have already produced
more than you need. You have obviously very considerable
improved flexibility from that, coupled with a very major set
of deregulations in the financial markets which has created a
degree of capability of this system functioning, which is where
I believe our economic growth is largely coming from. And my
judgment is that the most important thing that can happen is to
maintain that degree of flexibility. And it is the reason why I
find protectionism as a possibility very disturbing, because I
do not think we are aware of how much of our prosperity
reflects the extra ordinary expansion of the global economy in
the last 30 or 40 years.
Mr. Franks. Sir, I am pretty much out of time but I
appreciate you articulating what some of us have talked about
for a long time, that perfect storm on the horizon relating to
the aging baby boomer population.
Mr. Shays. Thank you. We will go to Mr. Edwards, Mr. Brown,
and then Mrs. Capps.
Mr. Edwards. Chairman Greenspan, thank you for being here
today. You have been consistent in saying that tax cuts,
whether in 2001 or today, being made permanent should be
matched with significant spending restraints and cuts as well.
You have been consistent, but my concern is that many of my
colleagues in Congress and leaders in the administration
conveniently hear the first part of your speech and ignore the
second part. They accept ``let us vote for tax cuts.'' It is
great, Chairman Greenspan now says they should be made
permanent, but they fail to heed your other advice that you
have to match that with spending cuts.
I will make a prediction today. Not one member of this
Budget Committee--and there are a lot of good responsible
members on both sides of the aisle--will officially embrace
major cuts in present services for Medicare or Social Security,
some of the issues that you raised in your testimony. So once
again, as we did in 2001, we are starting down the path where
people are using your comments about make these tax cut
permanent and digging a massive hole for our children and
grandchildren, and I have two small children and care deeply
about the deficit burden we are putting on their backs, as do
you.
My question is this, unless I find an outpouring of support
from our Republican colleagues today to say that they will vote
for reductions in Medicare present services, having just voted
to increase Medicare expenditures by $534 billion, unless they
come out for that or Social Security services cuts I want to
ask you how much spending do you think should be reduced in the
President's 5-year budget projections to do two things: One,
reduce the already massive deficit and; two, to help pay for
the cost of making President Bush's temporary cuts permanent?
My second question is if Congress does what I believe you
and I think we will do, as we will be deficit hawks, spending
hawks in our speeches and spending doves in passing budgets,
and all of recent history proves that is what is going to
happen, how serious a problem do you think it is if the end
result is in the next 5 to 10 years we have an average of $300
billion a year or more in deficits?
Mr. Greenspan. I think the crucial issue here is first to
get the budget process up and back to where it was before it
was allowed to expire, because I must say I was quite surprised
at how effective the Budget Act of 1990 was. I figured that the
Congress with 51 percent, just a majority, could overrule
everything and would, and you did not. And I think there are
reasons why you do not. I think there is a deep seated
understanding that there is something terribly wrong in
creating deficits of this size. It is very tough for anybody in
the Congress, as we have all known over the years, to do other
than create a benefit for somebody. That is easy and it is done
all the time but we have also learned it is a ratchet. Once you
grant it you cannot take it back or it is very difficult to do
so.
I can personally go through the budget and say I would do
this, this and this if I were Budget Director, but I do not
think that is the point. I think the point is if you put a
process in place and this committee and your counterpart over
in the Senate fixes in aggregate where you are going, you are
actually going to be forced to make choices.
Mr. Edwards. I agree with you and can I ask this though.
Given that I believe the administration and the Republican
leaders, the majority party in the House and Senate, have
opposed those PAYGO rules vis-a-vis tax cuts, given that
process is not going to most likely be put in place that you
are proposing, I am not asking you to give me specific programs
you would cut by specific amounts, but overall how much do we
have to cut spending to pay for making those tax cuts permanent
and how much additional spending cuts must there be to pay for
the already structural deficits we had before you make the tax
cuts? Give us a ball park figure if you could.
Mr. Greenspan. I cannot because I have not looked at the
figures. I am acutely aware of the numbers that Mr. Spratt was
quoting, and obviously you cannot get from here to there wholly
on those numbers. I fully recognize that. That is the point.
The question is that you have got to essentially look to see
what can be done and you cannot just give a number, you have
got to look within the programs. I used to be heavily involved
in budget processing and knew item by item and in very great
detail and I know that to make a generalized judgment without
knowing what is in those programs is foolish.
Mr. Shays. Mr. Greenspan, if you could in order to get all
the Democratic members, and there are more of them, we are
doing pretty well but we need to stay with that 5-minute rule
if I could. We will go to Mr. Brown, Mrs. Capps and then I am
next in line.
Mr. Brown. Chairman Greenspan, I would like to continue
along with the same line of questioning. It has been estimated
there would have been 2-million fewer jobs in America today if
we had not adopted a Tax Relief Act during the last 3 years.
What is your opinion of that?
Mr. Greenspan. I do not know where that number comes from
and I could not comment on it because it requires a whole
series of assumptions, but clearly I think that the tax cut has
had an effect on the economy, a positive effect, and I have
commented accordingly. But translating that effect into jobs,
given how variable the productivity numbers are, is in my
judgment very tough to do.
Mr. Brown. If you could give me an estimate of how you feel
the economy might sustain if we allowed the tax cuts to expire.
Mr. Greenspan. Well, I have said on many occasions in my
judgment that they should be continued because I think over the
long run they will benefit this economy. I am not thinking in
terms of the short run. I do not think that is an issue. I am
thinking strictly in terms of the long-term viability of this
economy.
Mr. Brown. I know we have been trying to track numbers, the
$5.6 trillion surplus, and trying to track it over a 10-year
period, and it seems to me that it is difficult to try to
project what is going to happen next year much less trying to
project what is going on 10 years down the road. In light of
that, in light of the way our budget is structured, do you feel
that we would be better served if we had a different level of
accounting, say asset accounting rather than expense
accounting, on a year-to-year basis?
Mr. Greenspan. It is possible that we could improve a good
deal of what we are doing and that our accounting is not
covering all of the areas of contingent liability which we
have. I am not sure, however, that that creates the political
will that is involved in the process unless you have a budget
process structure which automatically requires trade-offs, not
only on outlays and taxes but guarantee programs and other ways
by which the Federal Government preempts real resources. I was
involved with the Social Security Commission in 1983, and we
were going nowhere until all of the sudden we locked ourselves
into a specific ultimate goal which meant we either have to
change the receipt side or the benefit side. Everybody agreed
to what that difference had to be. And once you got to that
point the trade-offs gradually ground to a point where there
was virtual unanimity, not quite unanimity, but a very large
majority for a single set of proposals. That is why I emphasize
process because if you take any single program and put it on
the table and try to argue whether or not it is desirable or
not, it will always end up being desirable. It is only when it
is matched against another one you have a choice, either this
one or this one. You cannot have both; that is, actually make
the true choices.
Mr. Brown. Let me shift gears a bit. We keep hearing all
the time about spending Social Security proceeds. If we did not
spend the Social Security proceeds then what could we do with
the proceeds?
Mr. Greenspan. Are you referring to the trust funds
proceeds?
Mr. Brown. Yes, sir.
Mr. Greenspan. I must say that from a point of view of
budget control I think the unified budget is the appropriate
balance against which this committee ought to be functioning. I
think the various trust funds we set up are intra-governmental,
and they do not really create anything with respect to decision
making. And if frankly they were all eliminated, I would find
that nothing would be lost. So I am not a fan of trust funds
except when they are used to constrain expenditures, which they
do on occasion but that is only because people take them more
seriously than I think they really should.
Mr. Brown. I thank you very much.
Mr. Shays. I thank the gentleman. Mrs. Capps, then Mr.
Toomey and then Mr. Thompson.
Mrs. Capps. Mr. Greenspan, welcome to our hearing today.
Thank you for being here. In a recent speech you gave to the
Greater Omaha Chamber of Commerce, you highlighted the
importance of good education to the long-term health of the
economy. I read this speech with great interest and I agree
with your assessment that general access to our quality
education has been critical to our economic growth to date and
is perhaps even more critical to the future of our Nation's
success. And it is one of the reasons I am very disappointed
with this administration's failure to meet its commitments on
education funding. I also believe that similar arguments, and
this is the reason for bringing up education, can be made about
the importance of health care to our economy. And I would like
to ask you about this subject in the time allotted to me.
As a school nurse I can tell you that healthy students are
better students. Illness and injury are a distraction from
studies. I believe they are also a distraction from our
economy. When large portions of the work force lack health care
their ability to be productive is reduced and our economy
suffers. The Kaiser Commission on Medicaid and the Uninsured
reports that 40 percent of nonelderly uninsured adults have no
regular source of health care and forego needed care; that over
a third of the uninsured had trouble paying medical bills in
2003, a quarter were contacted by collection agencies; and that
the uninsured are more likely to be hospitalized for avoidable
reasons.
For these reasons it is my belief that making sure our
population has good access to quality health care is also a
critical element in sustained economic growth. And in the
context of this hearing today and of what you have told us
about the baby boom generation, I would like to focus on the
younger subset and ask you your assessment about the importance
of access to health care for our economy today.
Mr. Greenspan. If I were to list all of the various things,
programs, commitments, ideas that would be helpful for this
economy and this society, I think I would prove that we find
that the indispensable number of programs which have to be
funded represent a percent of the GDP which is not capable of
being reached. So I emphasize again the question of process,
that we have got to line up what our various priorities are,
and the only vehicle this country has got to do this is the
Congress of the United States. And you are the representatives
of the people and we all cannot, near 300 million of us, cannot
get in the middle of the street and make these decisions. They
have to be made and in the process of being made a number of
highly desirable programs do not get funded, and there is no
choice about that. In other words, it would be very nice if the
GDP were twice what it is and we can do all of this. But it is
not and it will not be, and so we are confronted with the issue
of choice and choice presupposes process. And I do not know any
other way to do it.
I cannot disagree with anything you just said. I am sure
that if I were to look at the evidence I would find what you
are saying is correct. And yet if you line up all of the
potential programs, all of which are highly desirable, indeed
in one sense almost obligatory, we do not have the resources to
do them all.
Mrs. Capps. If you say that health care is one of a number
of many programs, we are not getting to the fact of how basic
it is to survival and to productivity. There are a number of
ways we can deal with health care. That is what we are faced
with here. Professor Gruber of MIT says this administration's
tax credit proposal will only help 1.9 million of the 40
million uninsured despite its $70 billion price tag. So I am
asking if there is a way that we can structure the programs,
any programs to more adequately address this need.
Mr. Greenspan. Mrs. Capps, I am not sufficiently familiar
with the programs to give you any sensible judgment on that. I
do know, however, that every program that you get involved in
is extraordinarily complex and initial views are often wrong,
especially when you begin to look at the details, and I would
hesitate to try to get involved in something which I know would
take me 5 hours to answer.
Mr. Shays. I thank the gentlewoman. We will go to Mr.
Toomey, then Mr. Thompson and then Mr. Crenshaw.
Mr. Toomey. Thank you, Mr. Chairman. Thank you, Mr.
Greenspan, for your testimony here today.
My question is on a topic we really have not dealt with too
much thus far today. I want to preface it by observing that we
certainly seem to have a remarkable period of achieving virtual
price stability and the inflation in recent years has been
remarkably innocuous and at this point seems to continue to be
so. But I cannot help but observe that we have had in recent
years an extremely accommodative monetary policy. We have
commodity prices very broadly, if not across the board,
significantly higher in recent months and quarters. Gold is
over $400 an ounce. The dollar has had a very significant
decline in recent months. When I look at that combination of
events it strikes me that historically this kind of combination
of events would suggest that inflation if it is not with us now
is not terribly far away. The question is, one, how have we
managed to have these kind of events occur without yet seeing
an inflationary problem? Is it productivity? Is it more the
huge increase in global productive capacity, the increase in
the global labor force as a practical matter integrated into
the economy? Is there something systemic that means that these
kinds of historical indicators are no longer useful or in fact
is it just that we have got a little bit more time before this
does in fact catch up with us?
Mr. Greenspan. I think it is basically what you suggest. It
is productivity. It is the extraordinary rise in competition
coming from globalization. And there are structural changes,
but that does not mean that inflation is permanently subdued.
It merely means that the trade-off pattern is different from
what it was. But remember that most of the items which you have
discussed, mainly the commodity prices, are far smaller in
today's economy than they were 20, 30 years ago. In fact, an
ever increasing part of our economy is becoming conceptual
rather than physical. And all of the items which are in the
standard commodity index, including gold, are essentially
physical rather than intellectual. That is not to say they are
not important. They tell you various important things about how
this economy is behaving, but what we observe is this
extraordinary degree of globalization and increased competition
and a monetary policy which has generally been constraining in
the early period of inflation. So what we were doing was
continuously leaning against the inflation to assist it coming
down. But with productivity where it is, it overwhelms any
inclusionary forces that are coming from a number of the issues
that you raised.
Having said that, we watch this whole process exceptionally
closely, and as I have said in recent speeches, central banks'
formal fundamental mandate is price stability because it is
that which we believe will induce maximum sustainable economic
growth. So it has been a remarkably important decline in the
rate of inflation. We expect it to continue this way for a
while, but we are not by any means convinced that inflation has
somehow disappeared from the scene. We are certain it has not.
Mr. Toomey. Right. And if productivity increase has been
one of the main contributing factors to holding down inflation,
I think you have testified in the past that you do not believe
that productivity can continue to increase at the pace it has
in recent quarters, which makes sense given historical levels
of productivity growth. Does a decline in productivity growth
become, therefore, an indirect sort of indication of future
inflation?
Mr. Greenspan. What it tends to do obviously is move unit
labor costs from what has been a deep negative, meaning that
they have been going down for quite a considerable period of
time, first to stability and then, depending on what
productivity is, they would start to rise. Under those
conditions, obviously, the pressures will switch. We have not
seen that yet. We have not seen any real evidence of pressure
but we are watching very closely.
Mr. Shays. I thank the gentleman. We go to Mr. Thompson
then Mr. Crenshaw and then to Mr. Baird.
Mr. Thompson. Chairman Greenspan, thank you for being here.
Thank you also for your very honest explanation of the PAYGO
system. The idea that we can bifurcate that somehow I do not
think helps us fix the problems that we are in and I think it
really lacks the credibility. I believe we need to address what
I believe are very, very serious fiscal problems. As far as
putting a process together, as you so eloquently explained, I
think the one thing we have to be mindful of here is that there
is a strong element of honesty in that discussion as well. The
idea that we can continue to see increases in services,
decreases in tax cuts, it is just not real, or tax revenues, it
is just not real. We need to be honest, as you point out, when
we manage our expectations. I believe that will be a very
important part of us on both sides of this dais to fix the
problems that we face.
I am particularly concerned about foreign debt and the
amount that foreign individuals and foreign countries hold of
our debt. I have some numbers that I find to be frightening.
The idea that 70 percent of the last year's record $373 billion
deficit were financed by foreign investors concerns me, a 33-
percent increase in the past 2 years. Japan holds almost $600
billion of our debt, China holds almost $150 billion of our
debt, and I am concerned that this leaves us a possible victim
to economic problems that are outside of our control. And add
to that the fact that the billions of dollars that we are
paying in interest on this debt is not even being paid or part
of it is not even being paid to folks right here, but instead
this becomes the biggest foreign aid program that we have in
this country. I am worried about what may transpire because of
this. I would like to hear your thoughts on it.
Mr. Greenspan. I presume, Congressman, you are concerned
about the issue of what would happen if they started to sell
these securities.
Mr. Thompson. To sell them, to threaten to sell them or to
somehow decide that we are not such a good investment and do
something else with the money. I think it has got some interest
rate ramifications.
Mr. Greenspan. We have looked at that in some detail. First
of all, let us take the issue, assuming the selling of the
securities, and see what happens. We are dealing not only with
the size of the Treasury debt owed to the public but we are
dealing with a whole big block of securities in the United
States and all securities compete with each other. So there is
no question that if there is a sale of foreign assets which are
largely held by the central banks or the ministries of finance,
that it has an effect but it is very small. Not only are the
amounts of money, as large as they are, as you are noting,
relatively modest against the aggregate markets in this
country, but they also tend to be disproportionately short-term
instruments. And short-term instruments are huge in the United
States. The liquidity is such that their effects are relatively
modest. And remember that short-term rates are to a large
extent controlled by the Federal Reserve's basic policies. Now,
obviously, we cannot suppress rates without expanding our
balance sheet, creating huge increases in the money supply and
creating the problem that our colleague had mentioned. But
within a fairly broad area we can and do. Granted, the numbers
look very large.
Mr. Thompson. It is fast approaching $2 trillion on our $7
trillion debt.
Mr. Greenspan. I will venture that they will become a
number that at some point will disturb me, but at the moment
and in the foreseeable future it is still a problem for the
future, not for the current period.
Mr. Shays. I thank the gentleman very much. We will go to
Mr. Crenshaw, then Mr. Baird, then to Mr. Putnam. Then we will
go down the Democratic list and if there is time I would like
to finish up with questions.
Mr. Crenshaw.
Mr. Crenshaw. Thank you, Mr. Chairman, for being here
today. I have a couple of questions, one related to this change
in projections from surpluses to deficits. And everything that
I read, to a certain extent they are changed because of the tax
cuts, but only maybe some in Congress have said that might be
responsible for 25 percent of the change in direction. Part of
that is due to the war, the increase in spending, but a great
deal, probably the majority of the change in those projections
is due to this historical phenomenon which we have talked
about, that revenues have declined for the last 3 years, that I
think you said you are not really sure why. But does it not
make sense that, and maybe comment on the fact that we have
kind of made the point, other people have made the point that
it is hard to kind of cut enough spending to ultimately solve
the problem. If the President's budget increases nondefense
discretionary spending to one-half of 1 percent and we froze
it, that one-half of 1 percent I think lowers the deficit by $3
billion, the point being that we certainly have to control
spending but that may not be enough. Other people would say we
just need to raise taxes and solve it.
I guess the question becomes, in this phenomenon of
declining revenues, does it not make sense somewhere, somehow
that they will turn around? Maybe you can comment on that
because to a certain extent I do not know that we just grow our
way out of the deficit, but to a certain extent as the economy
grows and as projections change I have to believe that makes a
huge impact on the projection of deficits. Could you kind of
comment on that?
Mr. Greenspan. Most of those longer term projections of
revenue growth are already built into the current services
budget. It is possible that productivity will grow faster, for
example, than CBO is estimating. The problem is that we are at
the cutting edge of technology in this country. We cannot
borrow technology to increase our productivity growth. We have
to invent it, largely. That means that we are limited to how
fast productivity can grow, and historically, even in our best
periods for protracted growth, we very rarely get above a 3-
percent annual rate. The reason for that is it takes time to
invent things, to reorganize, to improve the way we produce
things. And as a consequence we do not know how to move fast
enough. If we were borrowing technology from somebody else, we
could do that pretty quickly. And indeed a number of the
developing countries borrowed our technology and increased
their GDP growth rate very rapidly. We do not have that
capability. So I doubt very much if we can find a scenario
which would say we cannot grow our way out of the deficit. More
exactly, we can grow our way out of the commitments which look
to be out there, essentially for Medicare. Medicare is really
the significant fiscal problem because we do not have a grip on
how big a number that could be. And as a consequence, I would
say to plan to grow our way out of this problem is probably
unwise. I do not think we can do it.
Mr. Crenshaw. Thank you. The last question has to do, we
have touched on this, in terms of short-term interest rates. A
lot of people feel like we are not saving enough and we are
kind of stoking consumer demand by these low rates. We are
exporting our net worth to other countries. In a broader sense,
could you comment on your view of the dollar? We have certainly
seen a dramatic increase in exports based on that. Are you
concerned at all? Is that an urgent issue with you in terms of
the dollar, in terms of that?
Mr. Greenspan. I am not allowed to talk about exchange rate
fluctuations in the sense that we have an agreement with the
Treasury Department that I can talk about the exchange rate but
not in a policy sense. And your question unfortunately is right
at the edge and I would just as soon let the Secretary of the
Treasury answer your question at some point.
Mr. Shays. I thank the gentleman. We are going to Mr.
Baird, then to Mr. Putnam and then Mr. Emanuel, go down the
Democratic list. I would like to fit myself in too as well. Mr.
Baird.
Mr. Baird. Mr. Chairman, I am glad you are here today. We
periodically in the Congress get letters calling for the
abolition of the Federal Reserve. Sometimes as of late I have
wondered if it has actually happened and I am glad you are here
to show it has not. The reason I have wondered that is because
both in this committee and in some cases in public statements
by the administration and others, we hear the administration
taking a great deal of credit for the low interest rates, and
it seems to me that the Federal Reserve deserves most of the
credit for that. I have a two-part question. The first is to
what extent would you say that the currently low interest rates
are the result of the Federal Reserve policy versus actions of
the Congress or the executive branch? That is the first part.
The second question, to what extent do you belive the low
interest rates deserve the credit for much of the economic
recovery that we are seeing today?
Mr. Greenspan. Congressman, let me say first that I think a
substantial factor in the low interest rates is the low
inflation rate. And the low inflation rate, as I indicated
before, is the consequence of a number of things, largely
globalization and the competition that has come from
globalization and a whole series of structural changes,
including, as I mentioned before, the bipartisan deregulation
that has been going on for a quarter of a century.
Part of the interest rates being where they are, is the
consequence of the Federal Reserve; to an extent that we
maintained a policy of constraint at times when inflation was
moving, we have assisted in bringing the rate structure down.
But I do think there are far broader forces which impact on
inflation and therefore on interest rates. And to answer your
last question, have interest rates being this low been a
positive factor, certainly.
Mr. Baird. Do you have an estimate to what extent that
applies? I will give you an example. When I am at town hall
meetings and I ask people how many have refinanced their homes
it is a tremendous number. And that must be putting a lot of
disposable income back into our economy, relative, for example,
to say the so-called middle class tax cut. Do you have a sense
of how much business investment or additional spending by
average American citizens has happened because of refinancing
or low interest rates for business investment?
Mr. Greenspan. Yes, we do. We estimate what the actual has
happened to debt service costs of the home owning households,
as a result of the very substantial refinancing which occurred
last year. It is, not a large number but it is enough in the
way to have really made a difference for those who have
refinanced. That is they brought their rates down and it has
impacted on their monthly commitments. I do not know how to
match it at this particular point against the tax cuts. The
data are available, but I do not have it at hand at the moment.
Mr. Baird. I thank the chairman.
Mr. Shays. Mr. Putnam, then Mr. Emanuel and Ms. Majette.
Mr. Putnam. Good morning, Mr. Chairman. A year ago in
testimony both before this committee and to the Joint Economic
Committee, there was a great deal of talk about deflation and
we have touched on inflation this morning. Is deflation no
longer a problem despite the falling dollar and continued low
interest rates? I would be interested in hearing about that as
well as some talk perhaps behind the scenes at the Federal
Reserve on setting inflationary targets.
Mr. Greenspan. The issue of deflation has never been a high
probability. But our concern is that were it to happen, the
consequences would be extraordinarily negative. And therefore
we have been keeping a very close eye on the possibilities of
deflation emerging. As I have commented previously in various
statements, speeches and testimonies, the probability of
deflation which a year ago was very low is now much lower. It
is not zero but we are fortunate in the sense that looking at
the way prices of goods specifically are behaving and looking
at the structure of demand and supply in various different
markets, the probability of deflation has gotten to a point
where it is not the size of the threat that it was a year ago.
Mr. Putnam. And are there discussions about setting
inflationary targets?
Mr. Greenspan. Well, there is a very significant discussion
going on in the economics profession of inflation targeting as
such. Obviously, we talk about it and implicit in most of our
actions are targets in the sense that my formal target is price
stability. I think it is very difficult to get a specific price
index in which you say this is exactly where price stability
is. But as I have said many times, I think we are there. CPI,
core CPI, for example, is 1 percent. We know there are
significant biases remaining in the price indexes we use so
that true price stability would be reflected in price indexes
which were increasing slowly, probably somewhere between a half
a percent and something a little under a full percentage point.
So in that regard I think we are at price stability.
I cannot speak for the rest of my colleagues, but we all
have a general view of where we would like to be and we vote
accordingly. Do we have an explicit number, an explicit price
index? We do not, and I am not sure that that would actually
enhance the capability of our doing a better job. There are
those I must tell you who do believe that and we are in
continual discussion. I do not think it is a big issue because
the practical implications are not very large. We all agree
where we want to be, and we largely interpret the numbers the
same way. So I am not sure if we actually had a published
explicit target whether it would make all that much difference.
Mr. Putnam. Thank you. With regard to mandatory spending,
both sides of the aisle speak of this a great deal, the
explosion of health care costs combined with the demographics
of this country is of great concern. If Congress were to act to
shift the ratio of mandatory versus discretionary spending, if
we were able to move that mark away from the two-thirds
mandatory, one-third discretionary figure where it roughly is
now, and move the transportation projects, the farm programs,
the student loan programs, let us say all programs in mandatory
other than Social Security and Medicare and perhaps some
veterans programs, would there be some credit given by the
markets? Would that have an appreciable beneficial effect or
would it create uncertainty over the level of funding and
particularly destabilize economy prices?
Mr. Shays. If we could have a short answer.
Mr. Greenspan. I think it will depend, if you were to do
that, what impact it had on the decision making process with
respect to outlays. It is what you do, not what you say or how
you categorize it, which matters in my judgment.
Mr. Putnam. Thank you.
Mr. Shays. Let me say, Mr. Chairman, we have basically six
members, including myself. We could get you out at 10 after.
Would that meet your need?
Mr. Greenspan. Certainly, I appreciate that.
Mr. Shays. Mr. Emanuel, Ms. Majette, then Mr. Scott.
Mr. Emanuel. Mr. Chairman, I will try to be quick. Mr.
Chairman, as I read your testimony and listen to you today, my
sense is that your analysis is that we are getting very close
to having a structural deficit which the markets will perceive
as dangerous versus a cyclical deficit and that your
recommendation is that we need to deal with that problem, and
between the IMF's view and Goldman Sach's view of deficits
being dangerous and CBO and OMB's which are manageable, you
have tipped the scale that we are getting very close, not there
yet, to a structural deficit which will be dangerous for the
market's inception.
My own view is I do not believe we should be cutting
entitlements to pay for these tax cuts if we make them
permanent, which is also one of the things that has been said
here. My own view is we have tried to finance, which is proving
history wrong, three wars with three tax cuts, and you cannot
do it. That is what has resulted in deficits, not the
entitlement spending.
In that sense and I raise with Mr. Thompson my own concern
about foreign countries owning our securities, and I think we
are getting close to a Suez moment with China owning so much of
our securities. I know you have said you analyzed it over at
the Fed, but have you analyzed China owning so many of these
securities and then have a situation like we did 2 years ago
where a plane went down in China with a political context
associated with it if they decide to dump our securities? Was
that part of the analysis of the Fed, not just the financial
short term of dumping securities but the political context that
would ignite such a move?
Mr. Greenspan. I do not want to say what we have or have
not analyzed, but I can assure you that we have looked at all
potential contingencies.
Mr. Emanuel. Thank you, Mr. Chairman. I will leave that
there.
The second point is we look at the issue of employment and
the lag I think in where the economy is going at this point in
the employment sector. Has the Fed looked at the benefit
structure, that is health care, retirement, as one who is a
hindrance toward hiring, that in fact at this point in the
economy there should be more employment and in fact health care
costs, retirement costs, legacy costs, you are going to decide
to keep somebody and have them work longer hours rather than
hire a new employee? Have you guys looked at that at the Fed?
Mr. Greenspan. What we have looked at is the evidence of
what is causing the slowdown in employment growth. We have
broken it down into a problem whereby we look at new hires and
separations whether voluntary or involuntary. The separations
are reasonably close to what you would expect to be happening
given the growth that this economy has exhibited in recent
quarters. It is pretty much on schedule. What is missing is the
new hires are far below where they ordinarily would have been
historically given this rate of growth. We attribute that
wholly to the issue of productivity growth. That is, business
people confronted with an increase in orders are finding that
they are able to meet those orders, expand production for
customers, without increasing hiring. They can do that largely
because there are unexploited inefficiencies in their
particular establishments which are a carryover from the very
large expansions that occurred in the latter part of the 1990s.
And it is that which is creating the difficulty.
Mr. Emanuel. Lastly, this may be more of a statement than a
question. As you said, between the two entitlements you see
Medicare as a bigger kind of dagger given the unexplained
improvements in technology, longevity. There has been a
bipartisan effort to deal with the recent prescription drug
benefit on how to control costs. One of the ways was using
market mechanisms. Obviously you will not endorse any
principle, but whether you are using reimportation or allowing
the Secretary of HHS to negotiate, if you are going to have the
benefit of that, there is a place here where Congress is trying
to get the government to act like a business and we have been
prevented from doing that. I am glad to hear that you see that
costs like this are dangerous to the long term health. Some of
us believe we have to control it or pay for it or be more
efficient in the way we do that. I am not going to ask you or
put you in a position to answer that.
Mr. Shays. I thank the gentleman. We will take the
Democratic side of the aisle and then go to Mr. Portman. Ms.
Majette and then Mr. Scott and then Mr. Portman.
Ms. Majette. Thank you, Mr. Chairman. Thank you, Dr.
Greenspan, for being here today. If I understood your testimony
earlier, you said that carefully crafted tax cuts would help in
terms of our strengthening our economic situation. I was
wondering if you could elaborate on what particular types of
tax cuts would stimulate the economy perhaps more so than the
ones that were passed in 2001 and 2003, and are there
particular types of tax cuts that have a more stimulative
effect on the economy or less so and particularly with respect
to small businesses and the benefits of reducing the burdens,
the tax burdens, on small businesses.
Mr. Greenspan. Well, I have testified before this committee
and others that I thought that eliminating or, as is in fact
was done, reducing the double taxation on dividends has been an
important factor in creating incentives for capital investment.
And I would certainly put the continued low tax rate, hopefully
zero tax rate, on dividends as a high priority. The major
problem, however, is the fact that we have what we call bracket
creep, in the sense that we do index tax brackets for consumer
price changes, but because productivity is not captured in that
calculation the actual effect is that you do not fully index
the brackets in that respect and more and more incomes move
into ever higher brackets and so the overall tax load continues
to grow. I think that is detrimental to growth and my general
focus on long-term tax cuts is largely focused on eliminating
bracket creep.
Ms. Majette. Thank you. With respect to the debt to GDP
ratio, and you mentioned that a little bit earlier, is there a
point at which that ratio gets to be too large and what do you
think about how we should address that issue?
Mr. Greenspan. That is one of the toughest questions we
have. We know that as it gets up to numbers well above where we
are today that other countries have run into trouble. But it is
a very good question in that we do not know exactly where
higher is not good.
Can we take some debt increase? Yes, we can. Would it be
destabilizing? I can conceive of a scenario in which it would
not be. But that is where the dangers begin to arise. When the
ratio of debt to GDP begins to rise, the debt servicing burden
obviously increases because the interest payments have got to
be paid out of the GDP or out of the income which is generated
by the GDP. So there is a whole series of economic evaluations
as to exactly what determines that degree of stability, but we
do not know a specific number in a practical sense until we
actually begin to construct various scenarios.
And all I could say about the current outlook is the
implicit growth rate, when we consider the lower probability,
but still reasonable probability, trajectories of receipts and
outlays, creates debt to GDP levels which I would find of great
concern.
Ms. Majette. Thank you.
Mr. Shays. Mr. Scott. We are getting more members coming. I
am getting concerned that I will be able to have everybody
speak.
Mr. Scott. Thank you, Mr. Chairman, for your testimony.
This chart shows what happens when you are willing to make the
tough choices. As you will remember, the tough choices in 1993
resulted in some politically unpopular results. Although we
eliminated the deficit and went into surplus, it had political
consequences on those of us who voted in favor of the green.
You have indicated that you need to make the tough choices
and I appreciate that and also that you need to make the
choices on both sides, both on taxes and on spending, you just
cannot make tough choices on one. You have talked about the
debt and deficit in terms of the GDP. It seems to me that the
GDP would be a measure of capacity to deal with the deficit and
the debt, but a more accurate figure for fiscal responsibility
ought to be how much of our budget is paid for with borrowed
money. We are right now spending a higher portion of our budget
with borrowed money than any time since World War II. Does that
speak to fiscal responsibility?
Mr. Greenspan. Well, it is a measure of lack of fiscal
responsibility.
Mr. Scott. Thank you. Your testimony outlines things we can
do to reduce Social Security. We have a Social Security surplus
for a purpose. Several years ago somebody noticed that we will
be running into the red and we are overtaxing Social Security
so that we can deal with the upcoming deficit. This is not like
a road tax trust fund where you decide not to build roads this
year. You deal with it. You continue taking the money. These
are liabilities that are real.
Now, we have been told that what the top 1 percent got as a
2001 tax cut would have been sufficient if put into the Social
Security Trust Fund to build up the trust funds enough so that
we could have paid Social Security benefits for 75 percent
without reducing benefits. Your testimony suggests that if we
give them a tax cut, as we did, we have to deal with it by
increasing the age, adjusting COLAs, possibly privatizing for
those younger retirees as if our choice was we got to cut taxes
and then we will scramble the best we can to try to deal with
Social Security in the future. Could we have made a different
choice?
Mr. Greenspan. Well, my recommendations are recommendations
I have been making for 20 years that are technical in the
following sense: The intent of the Congress is to hold Social
Security benefits to the cost of living. The problem is that
the indexes we have been using to adjust for the cost of living
are technically deficient. They are being improved upon by the
Bureau of Labor Statistics to try to eliminate these biases and
I was merely suggesting that if the intent of the Congress is
to be met that a far better index is available to do that.
With respect to the issue of indexing longevity, that is
merely the question of addressing the fact that the average age
that, let us see, the proportion of the population over 65 is
going to continue to increase indefinitely.
Mr. Scott. But that is the choice we make. What you are
suggesting is rather than maintaining Social Security, the
President means we are actually improving it and we have a
choice. We could improve Social Security essentially through
the back door, increasing benefits, or we could give a tax cut
to the top 1 percent. We have a choice. I do not know what
choice you would have made but Congress made the choice that we
are going to have to deal with the COLAs, increase age and
everything else.
Let me see if I can get in another quick question.
Mr. Shays. It needs to be quick.
Mr. Scott. Tax cuts with borrowed money. What effect does
the fact that we are borrowing money to fund the tax cuts have
on their ability to create jobs?
Mr. Greenspan. I do not think there is a relationship
there. The deficit does what it does and the tax cuts do what
they do. And I think that to relate them in my judgment is not
necessarily appropriate. I do think that, deficits are
something we should endeavor to avoid.
But if we allow the tax burden to rise, we are going to
have problems with our revenue base. So the choices are,
basically, how do you run fiscal affairs? And I think that
requires that you look at both receipts and expenditures in the
context of deficits. And I don't know, other than just to look
at the budget process, how one makes those judgments.
Mr. Shays. Thank the gentleman.
If we can go to Mr. Portman.
Mr. Portman. Thank you for your thoughtful testimony
today--I was here earlier--and your thoughtful analysis of what
our choices are.
I would disagree with my friend from Virginia that our
choices were the top 1 percent tax breaks versus Social
Security. Our choices were, are we going to have economic
growth that enables us to then have the revenue to be able to
get out of our deficit situation and to see jobs come back to
this country? And it is starting to happen, so I agree with
your structuring our choices.
And, Mr. Spratt, I appreciate your opening statement, which
I thought was very constructive. I think you analyze some of
our challenges very accurately. At the end you said, how do we
get back on track?
As you know, Mr. Chairman, one way people talk about being
back on track is to allow the tax relief that Mr. Scott talked
about to expire--the 2001 tax relief, 2002, and 2003. You have
talked a little bit about the overall tax burden growing
because of the way in which productivity has grown, and,
therefore, the indexing is imperfect.
Do you agree that we ought to allow the tax relief to
expire?
Mr. Greenspan. I have testified previously that my
preference is that it does not.
Mr. Portman. The second question I have relates to your
testimony.
You talked about the aging population. You talked about
investment and savings. And I don't want to put you on the spot
this morning--although you have probably been put on the spot
for the last couple of hours and you have handled it so well--
but it seems to me there are two big issues out there. One is
savings overall. And now, as you know, we have a 2.3 national
savings rate, we are told, which is anemic and far lower than
it has been even in the recent past, and much lower than our
trading partners or other developed economies.
Second, we have this crunch you talked about of the
demographics and the retirement crunch. You talked about health
care costs, but--obviously, an overall problem with an aging
population living longer. And my question to you is, would you
support this Congress encouraging savings on a long-term basis
that would affect retirement?
Right now we have a 401(k) program, we also have the IRA
programs, the Roth IRA. We also have a defined benefit program.
The question is, somewhat along the lines of what the President
talked about, would you be supportive of Congress encouraging
the incentives for long-term savings and perhaps also
encouraging those folks of modest income, who are not saving,
to be able to save by providing some kind of a match, much as
you would have in a 401(k) program, but now have the Federal
Government play some role there?
Do you think that would be constructive with regard to our
economy and with regard to the second issue, which is the
retirement crunch?
Mr. GREENSPAN. Well, Congressman, I think that anything
that would enhance national savings in and of itself is good.
The crucial question that we always confront in this regard is
whether particular programs actually do that. And I think it is
important in proposing any particular program to make sure that
it, indeed, does increase savings. And I think over the past we
have had some mixed results on that.
We are fortunate, I might say, in the one respect, that
despite the fact that we have a very low savings rate, we are
forced, in order to maintain our level of investment, to
essentially borrow foreigners' savings, which is our current
account balance. We seem to use those savings in a very
effective way, in that our rates of return on investment, as
reflected in the dramatic increases in productivity, say that
we are very efficiently using what we have.
But what we have is not large enough, because in a sense we
are required to borrow too much from our trading partners
abroad.
Mr. Portman. Thank you, Mr. Chairman.
Mr. Shays. Mr. Moore, you are next.
Mr. Moore. Thank you.
Thank you, Mr. Chairman. Ms. Majette, in her question,
asked you if--she didn't say it in these words--but if all tax
cuts are created equal; that is, do they have the same stimulus
and effect on our economy in terms of productivity.
I guess my question to you is, to try to follow up on that
for just a minute, you indicated, Mr. Chairman, that lower tax
rates on dividends is a very positive thing in your estimation.
Isn't that correct?
Mr. Greenspan. That is correct, yes.
Mr. Moore. If we are looking at different kinds of tax
cuts, such as AMT, marriage penalty, things of that nature, my
question, I guess, is about the estate tax and permanent repeal
of the estate tax.
There is--sometimes everything is not black and white, and
you don't need to go to one extreme or the other. And some
people right now are proposing permanent repeal of the estate
tax.Others are proposing increasing the credit to $3 million
per person, so for a husband and wife it would be about a $6-
million increase.
Do you have any thoughts about what might be--what might be
worthwhile there in terms of--and I guess my question, too, is,
what kind of effect would that have on the economy, a repeal of
the estate tax?
Mr. Greenspan. I have struggled with that issue. I don't
know where I come out. I think there are obvious questions of
its impact in certain areas of the economy, but it is hard to
pin down exactly what the impact is. And not having hard
evidence, I really can't have an opinion on that.
Mr. Moore. OK.
Mr. Edwards asked you earlier, I think, and Mr. Emanuel, I
think--anyway, somebody asked you about foreign holdings of our
securities and our debt in this country. And I think Japan has
over $500 billion, and China, over $150 billion. And you said
at one point--this is not an exact quote, but close, I think--
there would come a number which would disturb me.
I am not going to ask you for a precise number, but can you
give us a range of when we ought to start being disturbed about
how much foreign governments own of our debt?
Mr. Greenspan. Let me first make a general statement.
What history has shown is that because we have ever more
open markets and greater globalization and larger trade
throughout the world, the ratio of assets and liabilities of
each country--external assets, external liabilities--has been
rising much faster than trade. And so aggregate holding of
claims of foreigners against United States residents has been
rising at a very significant pace and will continue to do so,
so long as international intermediation continues to expand.
That is good, not bad.
It is only when the liabilities, net of assets, become a
huge burden to finance, then we begin to have a problem. But I
don't think that you can look at this issue in terms of U.S.
Treasury securities or corporate debt or something of that
nature. The total is what is relevant here.
The only way in which you can come up with a number which
says that we are in trouble in financing is when the aggregate
of liabilities, less the assets as a ratio to the GDP, become
sufficiently large as to make financing that net difference
between liabilities and assets exceptionally difficult.
We are nowhere near that point at this stage. But
obviously, the current account deficit is 5 percent of the GDP,
which effectively means that that ratio is increasing by 5
percentage points of the GDP each year, so long as we stay at
this level.
Mr. Moore. So in and of itself----
Mr. Shays. We have two more. And I need to get them out. Is
that alright, sir?
Mr. Moore. Yes, sir.
Mr. Shays. Mr. Hensarling is going to question for 2 to 3
minutes. Then we will go to you, Mr. Ford.
Mr. Hensarling. Thank you, Mr. Chairman.
Chairman Greenspan, due to the fact that I was at a markup
earlier, I missed some of the questioning. My assumption,
though, is that you heard a lot of the debate between whether
or not tax increases or spending restraint would be the best
method by which to address our Federal budget deficit.
I, for one, have concluded that given that we passed $350
billion of tax relief versus $28.3 trillion in spending in the
last budget, that roughly 99 percent of the challenge lies on
the spending side, especially since we are now spending over
$21,000 per household for only the fourth time in the history
of the Republic.
In previous testimony, I believe that you have spoken about
the need for budget process reforms, specifically about
reauthorizing PAYGO and discretionary spending. Is that correct
on my part?
Mr. Greenspan. That is correct.
Mr. Hensarling. My question, Mr. Chairman, is, there are
many other positive ideas in the budget process reform category
that have been discussed in Congress, such as the sunsetting
process, setting up a BRAC-like commission for different
government programs, setting up a rainy day fund so that we can
start planning for emergencies.
My question is, have you specifically looked at other
budget process reform ideas, and if so, what conclusions have
you come to?
Mr. Greenspan. Well, Congressman, I, for a number of years,
have argued that we ought to sunset virtually everything. And
indeed, at one point, I said ``everything,'' and a Senator said
to me, ``Including the Federal Reserve Act,'' and I said,
``Yes.''
Any institution which is essentially functioning
appropriately, should be able to pass very readily in a sunset
process. I am aware that there are technical problems involved
in sunsetting certain types of ongoing legislation, especially
relating to expenditure and taxation, but I think the principle
of sunsetting is a very useful concept.
Mr. Shays. Thank you.
Mr. Ford, you have the floor.
Mr. Ford. Thank you. I will be real quick.
Thank you, Mr. Chairman for being here. Good to see you
again. Tell your wife I said, ``hello.''
You talked about the choices, and Rob Portman asked some
good questions. But I just want to be straight and make sure
that we are consistent here.
If I am not mistaken, when Mr. Portman asked about
continuing these tax cuts you said, ``yes.'' When it comes to
defense spending you say, ``yes,'' but you are against the
rising deficits.
My friend, Mr. Hensarling, meant--not $28.2 trillion in
spending; I think you might have gotten your decimal points
mixed up, because we didn't have $350 billion in tax cuts and
$28.2 trillion in spending. If we did, we all be very happy
around here if we spent that kind of money on all the programs
we want it spent on. So I think you might have had your decimal
points mixed up.
Where do you say, ``no?'' Because I like tax cuts like
everybody else. And I ask that in the context of the AMT. More
than half of the families in America earning $100,000 or less
are to be hit by this thing in the few years. Where do we say,
``no?'' Because we are all trying to set priorities, but we
disagree over things here, obviously.
But, I mean, it is easy--if Rob Portman asked me if I want
tax cuts, I am going to say, ``yes.'' If he asks me if I want
more spending in schools, if I ask him if he wants more
spending in Cincinnati schools, he is going to say, ``yes,'' I
hope. If he asks me if I want more spending on defense, I am
going to say, ``yes.''
Where do we--I mean, expiring taxes, where do you cut them
off.
Mr. Greenspan. I would give you a long, long list. I don't
have a vote.
What I am trying to say is--individually, specific programs
are useful. But overall, we are still caught with the budget
process. And not all of the particular items that I, you, or
anybody else would like can be fundamentally fit into any
budget process. I recognize that.
I can give you my individual views as to where the budget
of the United States ought to be, and it will balance.
Mr. Ford. I would agree with anybody. If you put $350
billion back into the economy, that is going to stimulate
something. I think the question that Dennis Moore and others
have had about ``all tax cuts are not created equal'' is a fair
one to ask; and perhaps it calls for longer than 2 minutes and
45 seconds.
I know we want to close out.
Do you see any harm in the administration's not including
in its budget costs for the war this go-around, and should they
include that? Should they make some ball park guesstimate, Mr.
Chairman, based on our experience, with the war in Iraq and the
war in Afghanistan?
Mr. Greenspan. I remember the 1967 budget in which it was
not included, as you may recall.
Mr. Ford. I was not born yet, but I will take your word.
Mr. Greenspan. I think that the President has said that
those numbers are not included. We all know roughly what they
are. I would like to see some rough estimates in, and
endeavoring to understand where the budgets are, I do make that
adjustment.
Mr. Ford. So you think they should.
Mr. Greenspan. I would like to see it in.
Mr. Ford. Last question, Mr. Chairman.
I know we are all hesitant to say which programs we would
cut and what initiatives would be cut. Everybody--we talk about
the spending; we are only talking about--not only, but when you
look at the tax cuts versus the spending, we are talking about
$400 or $500 billion in terms of nondefense discretionary
spending.
How much would you cut from spending? I mean, we--if the
debate here is spending restraints versus tax cuts, I will
accept that.
Perhaps this is a conversation that we need to have on the
committee here as well, Mr. Chairman. But how much would you
cut in terms of discretionary spending to help us lower this
deficit?
Mr. Greenspan. I would cut as much as feasible, largely
because the longer-term fiscal outlook is assured if we resolve
most, if not all, of the problem from the outlay side. But to
the extent we try to adjust it from the tax side, we are
increasingly creating difficulties with respect to economic
growth and the tax base. The more taxes, the more tax rates are
raised; that is the principle I would go by.
Mr. Ford. If we cut the entire discretionary spending, I
don't know if we would cover the projected deficit for next
year. So, I mean, we can zero the whole doggone thing out and
still not, according to what the projections are for the
deficit for this year, be able to cover.
And I yield back.
Mr. Shays. Mr. Greenspan, I would like to finish up. I
won't take my full 5 minutes. But what I think that Mr.
Hensarling was referring to $28 trillion of future spending
over 10 years and a $300 billion tax cut over that frame.
But let me ask you this. Should we have in this committee a
10-year budget or a 5-year budget?
Mr. Greenspan. Implicitly, you have got 10- and 20-year
budgets, but you can't really detail them in a useful way
because you have no way of making estimates.
Mr. Shays. This committee is trying to decide whether we go
out with a 5-year budget or 10-year budget.
Mr. Greenspan. I understand that. All I am saying to you
is, I can't answer that question.
But I would say, irrespective of the particular length, you
should have a judgment as to where that is taking you beyond
the end of the particular period which you have chosen.
Mr. Shays. OK. Let me also say that I sometimes say you
speak in tongues. I don't think that anyone could claim that
today. Usually we both leave feeling you agreed with us--not
that that is always intended. But I would say that I think your
message was stronger to my side of the aisle than it was down
the middle.
I think that we really should ponder what you say about
PAYGO, both as it relates to spending and taxes, and that it be
incorporated now rather than later. And having been on the
Budget Committee for 10 years in the 1990s, I know the impact
it had. And I think your message is loud and clear.
I also would love to know your answer to Mr. Emanuel's
question about structural debt versus cyclical, whether--do you
think that we are playing close to having this become a
structural debt?
Mr. Greenspan. I do, Mr. Chairman.
Mr. Shays. And finally, sometimes when you say something
that may not seem controversial in the committee, it has been
reported in the wire services that, quote, unquote, you want to
cut Social Security. And I just want to give you the
opportunity to make sure we are--the article in AP was very
clear. The headline was, ``Greenspan urges Social Security
cuts,'' and I just want to give you an opportunity to be pretty
precise as to what you are suggesting.
Mr. Greenspan. I am not urging Social Security cuts. Over
the last 20 years, I have argued for an improvement in the
cost-of-living adjustment, which is statutorily what is
required.
I am saying we have better technical means of doing what
the intent of the Congress is. And I am merely repeating the
same proposals I have been making ever since I was chairman of
the Social Security Commission. I have not changed in the
slightest.
Mr. Shays. I just wanted to make sure that we dealt with
that.
So, anything you would like to put on the record before we
adjourn?
Mr. Greenspan. Thank you. I appreciate it.
Mr. Shays. Thank you very much. I ask unanimous consent
that members be allowed 7 days to submit statements for the
record and that the record remain open for that period.
Thank you. We are adjourned.
[Whereupon, at 12:20 p.m., the committee was adjourned.]